The Dollar was down against all major currencies on Tuesday as weak economic data continues to erode confidence that the U.S. economy will pull out of this near recession. The drop in existing home sales was another sign that the economy is still faltering although the rate of decline slowed.
The focus will definitely be on the Federal Reserve over the next seven days. While the Fed was busy trying to provide stability to the banking and credit markets, economic weakness continued to dominate the news coupled with the first sign of inflation in the March PPI figure. The Fed will find itself at next week's meeting having to deal with stimulating growth while preventing a flare-up in inflation. Early chatter has the Fed cutting rates by 25 bp with the language suggesting that the days of aggressive cuts are over.
As I've said for several weeks, the key to the longer-term direction of the EURUSD is to study the interest rate differential. With the Fed looking to cut one more time and the ECB threatening to leave rates alone or higher, traders are once again jumping on the long side of the Euro as they expect this differential to widen. There were no surprises from the ECB on Tuesday. The Bank has said all along that its mandate is to control inflation and get it down to 2% by next year. Taking an aggressive stance with a rate hike is certainly within its means. The speculative traders will be trying to figure out if the ECB is going to make the hike in between meetings or if they are going to wait until its next meeting.
As far as trading is concerned, the Euro is trading tentatively around the 1.60 area as if traders fear the unknown above this level. This stick-the-toe-in-the-water-first technique could last another day as traders want to be certain a G-7 intervention is not waiting for them over 1.60. Once the traders realize that the G-7 recognizes that the market is trading off true fundamentals and not just a speculative whim, prices will be allowed to move higher. Technically, all the market has to do is establish support at 1.60 or better and new buyers will surface.
The Canadian Dollar sold off after the Bank of Canada cut rates an expected 50 bp. Traders anticipate more cuts later in the year as the Canadian economy is expected to weaken along with that of the U.S. Once this negative news was out of the way, speculators quickly turned their focus on the crude oil market. As crude broke the $119 area, traders bought Canadian Dollars as oil is a major export in the Canadian economy. With the rate cut out of the way and the prospects for higher crude oil strong, look for this commodity based rally to continue.
The AUSUSD continues to drive higher and is now threatening to take out its all time high. With the global credit crisis easing, traders who are looking for more risk have turned to the Australian Dollar. News that last month's PPI was inflationary is also supporting higher prices at this time. In addition, traders have increased their bets that the Reserve Bank of Australia will raise rates at its next meeting on May 6. Continue to trade with the trend. There may be some initial selling on the first test of the old tops, but the strong fundamentals suggest that this area is not likely to hold as resistance.
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